Launched in August, the enactment of the Hong Kong Stablecoins Bill places the Special Administrative Region (SAR) among the first jurisdictions to implement a comprehensive stablecoin licensing regime.
According to financial strategists, being a ‘first mover’ at a time when stablecoin activity globally is experiencing a growth surge strengthens Hong Kong’s position as a competitive international market for both issuers and investors.
Stablecoins such as those regulated under Hong Kong’s licensing framework have several potential applications, including cross-border payments and remittances, and bridging traditional and digital financial systems.
What sets Hong Kong apart is the high bar licence holders are expected to meet
Notably, the scope of Hong Kong’s stablecoin licensing framework excludes non-fiat-referenced stablecoins, such as those linked to gold or other precious metals, algorithmic stablecoins, crypto-collateralised stablecoins and stablecoins issued outside of Hong Kong that do not reference Hong Kong dollars.
As well as the timing of the launch of a fiat-referenced stablecoin licensing regime, what sets Hong Kong apart is the high bar licence holders are expected to meet. Regardless of where they are issued, any individual or entity issuing fiat-backed stablecoins pegged to the Hong Kong dollar in Hong Kong or in another jurisdiction is required to secure a licence from the Hong Kong Monetary Authority (HKMA).
Licencees must also establish adequate and appropriate control systems for preventing and combating money laundering or terrorist financing.
Paving the way
Through offering a regulatory framework for institutions and investors, Hong Kong is seen to be paving the way for both international stablecoin issuers and institutional players seeking to establish a foothold in Asia.
While Hong Kong’s stablecoin regulatory framework has generated a lot of interest and represents a significant milestone in the SAR’s digital asset development aspirations, HKMA chief executive Eddie Yue has called for the public to ‘rein in the euphoria’ over the new bill, emphasising that Hong Kong’s stablecoin journey is still in its early stages.
To ensure stability, the HKMA requires licence applicants to hold a minimum capital of HK$25m (US$3.19m). Issuers are also required to maintain 100% backing of outstanding stablecoins at all times, with the market value of reserve assets equalling or exceeding the equivalent value of stablecoins in circulation held in high-quality, highly liquid assets with minimal investment risk.
The HKMA envisages that only a handful of licences will be initially granted
Further bolstering user protection, stablecoin users have the right to redeem stablecoins at their full value, with processing required within one business day, without facing unreasonable redemption fees. According to the HKMA, the licensing framework aims to foster a secure and innovative environment for stablecoins, positioning Hong Kong as a key player in the global digital asset space.
While the launch of the stablecoin licensing regime has generated excitement in the virtual assets and financial communities with banking institutions and tech giants expressing an interest, the HKMA envisages that only a handful of licences will be initially granted.
Step-by-step
Financial market observers note the cautious issuance of stablecoin licences is in keeping with Hong Kong’s embrace of other digital financial products based on a clear regulatory vision to become a leading international digital assets hub.
While the HKMA advocates a ‘step-by-step’ approach to the use of digital assets, potential stablecoin market participants are envisioning user case scenarios linked to assets that are integrated with the real economy, such as retail payments, property investments, infrastructure developments and as a means of payment for tokenised capital market transactions.
As the world transitions toward digital finance, with stablecoin issuance legally enabled, Hong Kong SAR is also in a unique position to serve as a testbed for regulatory innovation for stablecoin adoption in mainland China where currently the use of stablecoins is restricted.
